El Salvador unveils Bitcoin City plans amid default fears.

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2022-05-16 08:44:55

President Bukele shared illustrations and scale models of Bitcoin City, as credit rating agencies raised concerns about the nation’s ability to repay its debts.

Bitcoin City Model in El Salvador

Model of Bitcoin City in El Salvador

Last Tuesday (May 10), El Salvador President Nayib Bukele shared the first images of Bitcoin City. It will be built near the Conchagua volcano on the Gulf of Fonseca in the southeastern part of the Central American country.

Announced last November, the project will create a smart city, entirely using Bitcoin as a means of payment. An illustration of the urban design and scale was shared by President Bukele on Twitter. However, he did not disclose when construction will begin.

Image shared on the tweet of President El Salvado
The image was shared on the tweet of the president of El Salvador

Last year, El Salvador became the first country in the world to accept Bitcoin as legal tender, alongside the US dollar. The country’s funding is $1 billion in bonds. Public debt securities will be backed by bitcoin instead of fiat. Originally planned, the bitcoin bond was scheduled to be issued in March, but the announcement has now been pushed back to September.

Although in the model, Bitcoin City is in yellow form, Bukele said in real life it will be filled with green patches. He added that it will also be home to memorials, a volcano lookout point, commercial and residential areas and an airport. When announcing the project last year, the president explained that Bitcoin City would be exempt from most taxes.

Airport model design at Bitcoin City
Airport model design at Bitcoin City

In a statement last November, Bukele said that:

“We will have no income tax, forever. No income tax, no property tax, no shopping tax, no city tax and no CO2 emissions.” “The only taxes they will have in Bitcoin City are VAT, half will be used to pay the city bonds and the rest for public infrastructure and city maintenance.”

In addition, the president also announced on Tuesday (May 10) that the government of El Salvador has purchased 500 Bitcoin, the largest purchase of the cryptocurrency to date. The news comes as bitcoin has plummeted more than 50% from its all-time high.

See more: The amount of Bitcoin sold off reached a record level within 3 months

For the first time since July 31, the bitcoin price fell below $31,000. In his post on Twitter, Bukele said the government bought the latest amount of bitcoin for an average price of $30,744.

It is estimated that El Salvador has purchased 2,301 bitcoin since the country legalized Bitcoin in September 2021. The total value of this cryptocurrency at the time of writing is $74 million, much lower than the $103 million that Bukele spent.

El Salvador and the public debt situation

El Salvador and the public debt situation
El Salvador and the public debt situation

In the context of the price of Bitcoin going down, the Caribbean country can hardly afford to take on the debt. In April, El Salvador’s public debt repayment budget was reduced 15.1% to a historic low – a drop that has only been replaced by Ukraine since the Russian invasion of Ukraine occurred.

Government bonds are trading at 40% of their original value, as investors begin to doubt whether the country will be able to meet its next debt payment in January 2023.

While the president of the central bank of El Salvador said “no risk” Regarding the country’s debt default, credit rating agencies have a more negative view.

In February, Fitch Ratings – one of the three major credit rating agencies – downgraded El Salvador’s rating to CCC, i.e. “Possibility of default”.

In a statement, Fitch explained:

“The downgrade reflects increased financial risks stemming from a greater reliance on short-term debt, debt repayments of €800 million due in January 2023, fiscal deficits remaining high, range limited additional funding for local markets, uncertain access to additional multilateral financing sources, and financing from external markets due to high borrowing costs. ”

El Salvador’s transition to a blockchain and crypto-based economy appears to have failed. A study by the National Bureau of Economic Research in 2021 found that: among Salvadorans who downloaded Chivo Wallet – e-wallet designed by the government to facilitate daily crypto transactions – only 20% of users continue to use it after using the 30 USD that the government offers.

Due to the negative volatility of Bitcoin over the past time and the decline in acceptance from the people of El Salvador, the International Monetary Fund (IMF) has urged the country to eliminate the use of Bitcoin as a legal currency.

President Bukele’s insistence on keeping Bitcoin for legal tenders complicated his negotiations with the IMF. The organization said it must assess the risks of cryptocurrencies before lending to El Salvador.

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